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http://www.barrons.com/articles/art-science-and-gut-calls-1450464456

Balancing the Books

Art, Science and Gut Calls

By

JayPalmer

January 6, 2003

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(With contributions from the staff of Barron's)

THE BEST INVESTMENT BOOKS OF 2002

TALK WITH TOP INVESTMENT PROS,like those participating in this year's Barron'sRoundtable, the first installment of which will be publishednext week, and they'll say much investing is an art, where gut calls andvague feelings can play a pivotal role. But they'll also agree thatinvesting is a science of charts, numbers, balance sheets and techniquesthat can be learned. With that in mind, the Barron'sstaff has scanned the bookshelves to identify the bestinvestment books of 2002.

Our criteria were straightforward. We zippedthrough more than 300 investment books published last year, then winnowedthe pile down, excluding reprints (with two exceptions) andbusiness-related books that didn't focus on how to make money. So otherwiseexcellent works, such as former Securities and Exchange Commission chairmanArthur Levitt's "Take on the Street" (Pantheon, $24.95) -- which includestips for investors but is mainly an indictment of Wall Street malpractices-- didn't make the cut. Our admittedly subjective Top 10 list reflectsthose books that Barron's staffers found most interesting, entertaining and useful in theirrespective categories.

"Valuegrowth Investing," by Glen Arnold (Financial Times/Prentice Hall,$29), is an investment guide that will well serve both beginners andexperts. It starts by examining the philosophies and investing techniquesused by some of the world's best investors, Peter Lynch, Benjamin Grahamand Warren Buffett among them. It then looks at today's two dominantinvestment approaches, value and growth investing, and argues there needn'tbe a conflict. Best of all, Arnold makes his points in English, not theconvoluted language beloved by many writers on topics financial.

Those who like to hear the words of investment experts, some well-known,will like "Mastering Investment," edited by James Pickford (FinancialTimes/Prentice Hall, $34) and written by leading academics from fourbusiness schools renowned for fostering investment expertise. StuartChausse's "Advanced Portfolio Management" (Palisade Business Press, $29.95)is aimed mainly at seasoned investors, though it describes complicatedissues clearly and simply and gives advice that might be useful to bothpros and amateurs.

"The Secret Code of the Superior Investor," by James Glassman (Crown,$25), is an excellent pick for an all-round book on investing. Subtitled"How To Be a Long-Term Winner in a Short-Term World," it's well-written andoffers advice that is conservative and sound. Don't be an "outsmarter"investor, says Glassman, "since they don't care which companies they buy,only which stocks." Be instead a "partaker," someone who buys "goodbusinesses...sharing in corporate fortunes over the long haul." The booklucidly explains dividends, price/earnings ratios, cash flow, buying onmargin (don't do it, Glassman counsels), selling short (ditto), and taxconsiderations.

It isn't uncommon for winning money managers (or their alter egos) totake up a pen and try to tell how they do it. Within this genre, you can'tgo wrong with Janet Lowe's "The Man Who Beats the S&P" (John Wiley,$29.95), an examination of the techniques and tactics of star value-fundmanager Bill Miller, chief executive of Legg Mason Funds Management.Through Lowe, Miller shares his strategies for investing in the old and neweconomies, offering examples of what stocks he bought, why he purchasedthem and how they've fared, all supplemented by charts, graphs andtables.

"Straight Talk on Investing," by Jack Brennan with Marta McCave (JohnWiley, $22.95), falls into the same category. It's a study of buy-and-holdinvesting that emphasizes the indexing and penny-pinching made famous bythe Vanguard Group, whose chairman and chief executive is Brennan. Amongthe shibboleths it trumpets: diversification, asset allocation, dollar-costaveraging and saving your shekels -- for the most part familiar stuff but aworthy tonic for investors whose idea of a balanced portfolio once was toown
Yahoo!,Cisco
and
Amazon.com.
We fault only therepeated mention of Vanguard.

"Bulls, Bears and Brains," by Adam Leitzes and Joshua Solan (John Wiley,$24.95), aims to show you how to invest with the "best and brightest of thefinancial Internet." Though it contains worthwhile interviews with admiredinvestors, we were put off by the breathless jargon and the brassy claimsthat this book is an "investing bible for the early twenty-first century."Think of it more as a travel guide for tired Web-surfers and destitute daytraders. Missing is the "how to" aspect.

Another book that seeks to share expertise is Daniel A. Strachman's"Essential Stock Picking Strategies" (John Wiley, $29.95), which uses ananecdotal approach to teach, turning to the experiences of folks such asDelphi Management's Scott Black, a Barron's Roundtable member, and Christopher Brown of Tweedy,Browne. Each interview includes some lessons from the portfolio managersand examples of how those lessons were applied in real life. It makes foran interesting read, but it's short on the basics.

Another worthy tome, "Wealthy & Wise" by Heidi L. Steiger (JohnWiley, $24.95), is a collection of readable and informative essays by topwealth experts on how to make money work for you. The book contains somerevealing anecdotes and, while it certainly won't answer all yourquestions, will help you find help. Still, now that the era of instantriches apparently has passed, the whole idea of carefully following apoint-by-point mission plan to success seems somehow naive.

If you're turned on by looking into the psychology of investing, whymarkets aren't always efficient and investors aren't always rational, turnto "Outsmarting the Smart Money" by Lawrence Cunningham (McGraw-Hill,$29.95). Though he makes little attempt to go over the nuts and bolts ofinvesting, he raises points familiar to industry pros but not to someretail investors -- for example, that market action can be distorted whenlarge institutional investors trade to dress up their portfolios atyear-end.

Cunningham also warns investors away from buying initial public stockofferings. He notes that of the 10 top-performing IPOs as of the last dayof 2000, all but one subsequently fell at least 92% -- and the exceptionslid 87%. He'd also avoid companies that borrow money to repurchase stockor that do buybacks to decrease dilution due to stock-option grants. And hecautions to be wary of corporate "spin." Press releases aren't the same ascorporate reports. Likewise, beware of analysts' reports and understand thedifference between generally accepted accounting principles and pro formaaccounting.

Despite a title better suited to a Hollywood B movie, Dr. AlexanderElder's "Come Into My Trading Room" (John Wiley, $49.95) offers a plethoraof sound and sober advice for one of the most difficult tricks in theworld: making money as an independent trader. As befits a strong book forbeginner investors, this one provides the big-picture basics on tradingstrategies and technical analysis, but also pays attention to the littlethings that can make or break tyro investors, such as the power of capitalsize in withstanding long losing streaks.

Ordinarily we run from books by TV anchors, but "Trendwatching," byCNBC's Ron Insana (HarperBusiness, $24.95), is well-written and does a finejob of explaining previous bubble markets and the warning signs investorsshould watch for. It's an able recount of the Internet bubble inparticular, while setting previous manias in historical context. Our mainquibble: For a book purporting to help investors, it doesn't offer muchadvice on investing.

Bits From the Bubble

A study of the same phenomena is available in "Bubbleology" (CrownBusiness, $18.95), by Kevin Hassett, a scholar at the American EnterpriseInstitute and co-author of the controversial "Dow 36,000." Though it takesa fresh, often lively look at how bubbles form and ultimately burst,drawing on research in economics, psychology and social sciences, itdoesn't dig deeply enough to be truly enlightening or especially useful.Hassett's main advice -- stick to stocks that are moving in response toidentifiable news events -- borders on the self-evident.

Protecting retirement money is a timely theme in light of the horrorstories about employees at Enron et al. This issue is addressed neatly intwo books: "The Ultimate Safe Money Guide," by Martin Weiss (John Wiley,$24.95), and "Protect Your 401(k)," by Larry Chambers and Ken Ziesenheim(McGraw Hill, $10.95). Both offer nuts-and-bolts advice on how to reducethe risk in your portfolio and safeguard investments. Anyone nearingretirement should read one...or both.

Investors experiencing the first serious bear market of their lives willfind good counsel in Harry Schultz's "Bear Market Investing Strategies"(John Wiley, $49.95). Turn away from buy-and-hold strategies, it argues.Work for those returns instead, research the market with rigor and adopt atrader's willingness to move in and out of particular shares -- or even outof the market entirely. "When in doubt, stay out," he counsels sensibly.Although he says he's open to both fundamental and technical analysis, heclearly favors the latter. In fact, at least a quarter of the book isdevoted to technical analysis.

Larry Elliot & Richard J. Schroth's "How Companies Lie: Why Enron IsJust the Tip of the Iceberg" (Crown, $18.95), bills itself as an"Investor's Guide to Corporate Smoke & Mirrors." But, if this is meantto say the book offers investors practical advice, then this is a casestudy in how dust jackets can mislead. Most investors are ill-equipped toanswer questions such as, "How can you explain the last three years of thecompany's statements of cash flows and return on capital?" or "Who is onthe board, and what are the backgrounds, accomplishments, mistakes andqualifications of the directors?"

"Conquer the Crash" by Robert Prechter (John Wiley, $27.95) gives awayits basic thesis in its subtitle: "You Can Survive and Prosper in aDeflationary Depression." The author, the grand guru of the Elliott Wavetheory of technical analysis, warns that this is where the economy isheaded and gives fairly obvious advice on where to invest in thateventuality, some of which sounds like an ad catering to the gullible. Forexample, talking about the coming real-estate bust, Prechter advises: "Atthe bottom, buy the home, office building or business facility of yourdreams for ten cents or less per dollar of its peak value." At the bottom?The "ten cents or less" is the only advice we get on how to know the bottomhas arrived.

We also quarrel with some of Prechter's basic data. On page 108, figure11-5 purports to show that Total Credit Market Debt accounts for a largerpercent of nominal gross domestic product (300%) than in 1930. Not true,since 100 points of those 300 consist of double counting. (Sad to say, thesame chart was featured in a Barron's column about six months ago.)

We enjoyed "When Buy Means Sell," by Eric Shkolnik (McGraw Hill,$24.95), but would question whether it is, as billed, an "investor's guideto investing when it counts." The book deals more with which specificbrokerage firms have made the best and worst recommendations and whichmoney managers have performed the best. All that is no more thaninteresting history.

An entire book about stock screening? Sounds a bit much? Perhaps, butusing a computer to screen the market for stocks that meet certain criteriais becoming a popular pastime, and no one is better placed to explain theprocess than Marc H. Gerstein, the director of investment research forMultex, the online purveyor of stock research and data. In "Screening theMarket," (John Wiley, $49.95), Gerstein covers the basics and more, thoughthe writing is technical enough to make this book slow going indeed. Still,if screening is your game, this is a must-own.

Technical analysis can be exhaustingly abstruse, and several new booksseek to explain its mysteries. "Dynamic Trading Indicators," by Mark Helwegand David C. Stendahl (John Wiley, $69.95), takes great pains to simplifythe use of value charts and price-action profiles as a tool for determiningthe "optimal entry and exit points" of stocks, based on recognizing thatvalue is a function of time, relative to the overall market. But the bookquickly loses its punch -- and makes dull reading -- by painstakinglyexplaining the basis for the theory.

Crafting Analysis

"How Technical Analysis Works," by Bruce M. Kamich (Prentice Hall, $30),is more readable, offering a comprehensive and cogent introduction to theart of reading price charts, detecting important technical patterns andusing them to construct trading strategies. Kamich refers to technicalanalysis as a "craft" -- something not fully scientific and learned largelythrough experience. This enlightened approach lets him avoid thedoctrinaire hucksterism of technicians who claim to offer a secret,foolproof path to profit. The book provides plenty of real-worldillustrations and is refreshingly candid about the shortcomings of anysingle chart signal or trading rule.

The title of "Big Trends in Trading: Strategies to Master Major MarketMoves," by Price Headley (John Wiley, $39.95), promises a bit more than thebook delivers. But this is, nonetheless, a useful primer on using a blendof stock-options strategy, contrary sentiment indicators and technicaltools to locate stocks poised for dramatic moves. Of special note areHeadley's dissections of crowd psychology and the practical virtues ofleaning against the prevailing winds of sentiment.

Market timer Michael McDonald's "Predict Market Swings With TechnicalAnalysis" (John Wiley, $39.95) also treads the terrain of public investorsentiment and technical indicators, but to less practicable ends. Itprovides a labored and unsatisfying scheme for determining a stock's fairvalue, while putting forth a stock-market model that makes a puzzlingequation of three distinct "feedback loops" and his fair-value calculation.Much of McDonald's discussion of investor psychology and tactics fordealing with a trading-range market are worth reading, but the ultimatepayoff for the hands-on investor is underwhelming.

"Stock Investing for Dummies," by Paul Mladjenovic, "Investment Clubsfor Dummies," by Douglas Gerlach and Angele McQuade (both John Wiley,$21.99), and "401(k)s for Dummies," by Ted Benna and Brenda Newmann (JohnWiley, $16.99), all are good starting points for those interested in theirrespective topics. In fact, the "Dummies" books are addictive because ofthe amount and quality of the data they provide. For beginners and expertsalike, these softcover works -- not withstanding the titles -- are smartinvestments.

Teens Trainers

Investment guides for teenagers and other market newcomers wereplentiful in 2002. Among the best is "The Motley Fool Investment Guide forTeens," by David and Tom Gardner with Selena Maranjian (Fireside, $14).Designed for young people seeking to master the fundamentals of investment,the writing is clear and engaging and the advice good and conservative."TeenVe$tor," by Emmanuel Modu and Andrea Walker (Perigee, $12.95), isanother excellent resource for learning not only the basics of investing instocks, mutual funds and IRAs, but also the workings of the economy.

Despite its hyper title, "Getting Loaded: Make a Million...While You'reStill Young Enough to Enjoy It," by Peter Bielagus (New American Library,$12.95), is still another decent introduction to investing for the youngand unscarred. For its part, "501 Stock Market Tips and Guidelines," byArshad Khan (iUniverse.com, $21.95), manages to list hundreds of usefulstock-market tips with Zen-like brevity and simplicity. But that strengthis also the book's weakness, in that any interested reader will quicklyhave to move on to a book with more flesh.

We also recommend "The SmartMoney Guide to Long-Term Investing" and "TheSmartMoney Stock Pickers Bible," both by Nellie Huang and Peter Finch (andboth from John Wiley, $24.95), two of the latest in the series from oursister publication, SmartMoney (which is co-owned by Dow Jones, publisherof Barron's). These easy-to-read books do a decent job layingout investment basics and include some important reminders. Our only mildcriticism: They still contain traces of excessive bull-marketenthusiasm.

Finally, though a reprint and not the first reprint of this work atthat, we have to recommend the latest reissue of Benjamin Graham and DavidDodd's classic 1940 work, "Security Analysis" (McGraw Hill, $60). Bewarned, this near-900-page book isn't easy reading, in part because thetype is so dreadful. But the lessons contained herein form the foundationsof modern investing.

Another reissue we recommend highly is the paperback version (Texere,$16.95) of Hugo Dixon's 2001 hardback, "Finance Just in Time." A formerwriter of the respected Lex column in London's Financial Times, Dixonpresents clear and uncomplicated reviews of finance and investing. He usesfictional characters to explain company valuations, mergers andacquisitions, speculation, balance sheets and market crises. Pros may knowit all, but even they will find this a fun and enlightening read.

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